There is no case whatsoever to nationalise more banks, let alone for taxpayers to be made to take equity stakes in all the banks. There is a new kind of madness stalking the government world, as the governments lurch from one inappropriate response to another in response to a fast moving banking crisis. Governments helped create the crisis, by keeping interest rates too low and looking the other way as the banks and Shadow banks heaped debts on debts. Then governments helped bring the crisis on by keeping interest rates too high and refusing sensible help in the early stages of the crunch.
Governments should look after taxpayers. Taxpayers cannot afford to nationalise the banks. If governments assume too many new risks by taking on the assets of the banks or buying them up, it merely shifts the problems from the private sector to the public sector. It does not solve it. The problem will then become how do governments pay all the bills? How can they finance themselves in a non inflatonary way? How high do taxes have to go? A banking crisis does not suspend the laws of public finance. Buying bank shares is just like hiring teachers or buying more paperclips for a government office – only less popular with the taxpayer.
The public will be angry if governments do this. The feeling will stay abroad that there is one rule for bankers and one rule for everyone else. All the other businesses that will now go under thanks to the hostile economic climate will not enjoy a bail out because they have “got it wrong”. The senior bankers paid themselves huge bonuses and salaries in the good times, so why should they benefit from a rescue when their businesses go wrong?
Some of the world’s banks should be put through administration because their balance sheets are blown to pieces by the changed climate. Many need appropriate action by the authorities to help them through the crisis. To do so the authorities need to stop misrepresenting the true problems.
This is not just an American crisis. It is also a European one.
Interest rates are far too high in Europe and the UK. What does it take to get the hopeless MPC and the ECB to recognise this? Do they want the whole banking system to melt down before they see the problem? Will they accept their responsibility for fuelling the inflation in the first place? When will they see the problem is no longer inflation but massive deflation?
This is a crisis of confidence in asset values, brought on initially by too little liquidity in banking markets. Will authorities now solve the short term liquidity problem with whatever it takes as they promise to do? They have at least made moves in that direction in the last few days, a year too late. Will they go on to require the banks to solve the capital adequacy problem by insisting they raise new capital from anyone but the local taxpayers who have no wish to go to the rescue of their local banks under the management of national governments? Again, this is something the banking regulators should have required last year as the crisis began.
Usually watching authorities around the world I reckon they do the right thing when all else has failed. This time I am not so sure.